'The merger will not bring down charges for smaller share dealers'

Friday 12 May 2000 23:00 BST

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The London and Frankfurt Stock Exchanges are to merge! So what, I hear you ask. Paris, Brussels and Amsterdam have already announced they are getting together. New Zealand is cosying up to Australia. And, anyway, what does the merger of two stock exchanges really mean to me, a private investor?

The London and Frankfurt Stock Exchanges are to merge! So what, I hear you ask. Paris, Brussels and Amsterdam have already announced they are getting together. New Zealand is cosying up to Australia. And, anyway, what does the merger of two stock exchanges really mean to me, a private investor?

It is important to understand why this merger is proposed. First there is the threat that the internet presents to established markets. In the United States, an increasing amount of business is being carried by so-called ECNs (electronic communications networks). A number have applied to become recognised exchanges in their own right. Indeed, one has brought in the Pacific Stock Exchange as shareholder and partner to speed the process. Europe may look a little less vulnerable to these new trading platforms but they are a threat that is unlikely to go away.

The global institutions - those professional fund-management operations that trade and own shares all around the globe - are the second driving force. These are important customers for stock exchanges, and they want to see dealing costs driven down. This becomes much easier if the number of exchanges reduces.

Hold on a moment, though. Where have we heard this before? Big Bang in the London Stock Exchange back in 1986 was all about deregulation and cheaper dealing. Until then, stockbrokers' commissions had been fixed. One result of Big Bang was to drive commission rates which started at 1.65 per cent swiftly down to 0.2 per cent for the biggest traders. Subsequently, rates have slimmed even further. The benefits to the investing institutions were immediate and considerable.

And what happened to the private investor? Not much. True, there are now execution-only houses which provide a no-frills dealing service at rates considerably below those that applied before Big Bang. But traditional advisory stockbroking services continue to attract charges between 1.5 and 2 per cent of the value of the trade.

I see no reason why a new pan-European exchange, operating across borders and using systems common to the rest of world, will benefit the smaller buyer and seller of shares. Charges are unlikely to rise, but they are also unlikely to fall.

Apart from that, there is talk of shares being denominated both in sterling and euros - something the Global Player is unlikely to be concerned about, but which will not necessarily be welcomed by the person with a £100,000 portfolio.

Then there is the question of what might happen to indices. Already a number of pan-European indices have been created to reflect the growing globalisation of investment business and it could be that these will ultimately replace such familiar benchmarks as the FT-SE 100.